India’s GDP growth estimate and the law of unintended consequences

The more one thinks about it, the more I feel that the Central Statistical Organisation (CSO) has done a big disservice to India. Politicians will always be politicians. They have short-term compulsions. Much as we talk of rational policy making, they do undertake rational policies that suit their goals, even if they are not in the long-term interest of the nation. They are fine as long as they satisfy popular demands in the short-term. So, the only way or the only time politicians act in the long-term interest of the nation is when the nation is in crisis. Then, they take short-term unpopular decisions because there is no choice.

India’s economic growth number could have been one such crisis but by printing numbers that are above 7% with their new methodology, CSO has taken away the sense of urgency.  It is not my case that their estimation is mala fide. Nor am I holding the Government of India responsible for it. I have serious questions about their growth estimate for 2013-14 too.

For my previous blog post on the issue of GDP growth estimation, please click here. I had provided links to two of my briefing notes on this matter written for Athena Infonomics.

RBI’s potential growth estimate is around 6.8%, as per their working paper last year. The latest RBI Monetary Policy Report shows that the output gap (actual growth – potential growth) is around 1%. So, RBI estimates the actual growth at 5.8% for its analytical purposes, it seems. This is my inference only.

Similarly, for 2013-14, CSO reported that India grew at 6.5%. RBI’s output gap in that year is around 2%. It cannot be that India’s potential growth in 2013-14 was 8.5%. In fact, IMF had estimated it to be around 6.5% (working paper published in January 2014 – p.6 last paragraph). Indeed, in one estimate (published in the World Economic Outlook, October 2013 – Box 1.2), the Fund had put India’s potential growth rate at 5.7% then. Hence, whether it is 5.7% or 6.5%, the actual growth rate must have been at most 4.5%, given the output gap of around 2%, then. But, CSO now estimates India’s real GDP growth in 2013-14 at 6.5%.

If  that is true, in the last three years, India’s real GDP growth has managed to edge up to 7.1% in 2016-17 (second advance estimate). That is no big achievement. But, 4.5% and 5.8% would tell us a different story. They would have been embarrassing. The government of the day would be impelled to act. CSO has forestalled that with its new estimates. At the same time, it is two years since the revised numbers and the methodology have been published. We do not have the historical series based on the new methodology with the new base year (2011-12).

Notwithstanding all the affirmations of integrity of the CSO, it has not acquitted itself well at all. I am constrained to say that.

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